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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: piggington who wrote (35931)	7/13/2005 8:16:42 PM
From: zebra4o1	Read Replies (1) \| Respond to of 110194

Wouldn't defaults be more of a lagging indicator than a leading indicator?

To: piggington who wrote (35931)	7/13/2005 8:43:23 PM
From: russwinter	Respond to of 110194

I don't think defaults will tell us when the downturn starts. That will come later as soon as prices head south and will catch the subprimers first. I think the deadend pressure (psychology) of the whole exercise will discourage people to cash out once the hype wears off (now IMO), and once they see the obvious negative headlines that are starting to appear. For sake of illustration let's focus on an individual making 85k, "qualifying" for a $500k condo conversion (a dump really), who bought last July in SD. He uses a one year teaser ARM at 3.75%, but set to a one year Libor. He is basically just borrowing it all, which is how these creative programs work. He's P&I alone is $2,316 a month, or $27,792 a year (a third of what makes), doesn't include prop taxes, doesn't include cooling, or new toilet seats (about $20 for a simple one), heaven help him or her, if he has to fill his gas tank. Now sure, he supposedly has 50K in appreciation, so of course that's been borrowed to actually furnish the place ,and buy gasoline for the thirty mile commute. Now this month he gets his new rate, capped thankfully at "only" 5.75%. It would have been 6.5% because he's nonconforming or subprime, but he's been saved, this time. New P&I is 2,918, or $35,016 a mere 40% of what he makes. But he borrowed the other $50k on a 5 year HELOC tied to prime plus(now about 9.0 for this kind of borrower) (). That's another $250 IO a month. So that's $3,168 a month JUST FOR P&I, or 45% of what he makes. I just don't think that's a situation that's going to provoke optimism, especially once he gets wind that prices are flat, let alone declining. These people will run to the realtor and to get off this escalating treadmill, as renting is much cheaper. And those that don't, or are too slow, then the defaults will start in earnest in due course. First we see the listings and inventory mount, that's where we're at today. () small print on a typical HELOC loan, toxic: You can obtain credit advances for 5 year(s) (the "draw period"). At the end of five years, you may have the option to renew the "draw period," subject to our consent as to the renewal. During the draw period, payments will be due monthly. Your minimum monthly payment will equal the amount of accrued interest only. The minimum monthly payments during the draw period will not reduce the principal that is outstanding on your line. After the draw period ends, you will no longer be able to obtain credit advances and must pay the outstanding balance on your account (the "repayment period"). The length of the repayment period is 20 year(s). During the repayment period, payments will be due monthly. Your minimum monthly payment will equal the amount of accrued interest plus 0.4167% of the principal loan account balance at the end of the draw period. The minimum monthly payments may not be sufficient to fully repay the principal on your line by the end of the draw and repayment periods. If they are not, you will then be required to pay the entire balance in a single payment. Minimum Payment Example: If you made only the minimum monthly payment and took no other credit advances, it would take 25 year(s) to pay off a credit advance of $10,000 at an ANNUAL PERCENTAGE RATE of 8.5%. During that period, you would make 60 payment(s) of $70.83 followed by 239 payment(s) varying between $112.50 and $41.64, with a final payment of $3,712.28.